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CBRE Sees Persistent Lag in Leasing Velocity

Rising Vacancies Fuel "Tenants' Market" Throughout DC Region

​Washington, D.C., June 25, 2013 - As the second quarter of 2013 draws to a close, early indicators suggest that the Washington metropolitan region remains a “tenants’ market” fueled by limited leasing activity and rising vacancies.While the overall economy continues to show positive markers, office markets in the District, Northern Virginia and Suburban Maryland remain stalled in a period of listless activity, dampened by a push for greater office efficiencies and federal budget concerns.

“This recovery appears to be on a different track.Rather than a single factor, a combination of factors could come together in the future to drive a stronger recovery,” said John Germano, Executive Managing Director of CBRE’s Mid-Atlantic Region.

Prior to publication of CBRE’s quarterly reports, office leasing velocity throughout the metropolitan Washington region remains relatively unchanged compared to the first quarter of 2013, but is down 25 percent from the second quarter of last year.The region is experiencing a relatively stable employment picture, although the drive toward workplace efficiencies means fewer square feet per office worker, which translates to lower net demand for office space.

In Washington, D.C.,slower leasing velocity, in part because of numerous early lease renewals completed during the recent recession, foreshadows a similar pattern for the remainder of the year. Demand also remains anemic with fewer large tenants in the market for space and several federal leasing prospectuses waiting on congressional approval. The vacancy rate decreased to end the second quarter at 10.2%; this is a result of slight growth among smaller firms (under 20,000 square feet) and many renewals in place. Rents remain relatively unchanged, while concessions are well above historical averages. The quarter’s largest leasing transaction was the U.S. Secret Service renewal of 78,700 square feet in the East End.No leasing transaction was over 100,000 square feet, a stark contrast from two years ago when there were five transactions of that size.

In the Northern Virginia office market, the vacancy rate increased to 16.2 percent, surpassing the previous high-water mark of 16 percent in 2002 and driven in large part by tenant moves and consolidations. Net demand remains negative, but is improving compared to one year ago. Due to growth in technology firms, some smaller tenants—many new to the market—are moving in. Rents decreased $1-2 per square foot, especially along the Toll Road where landlords remain aggressive with rates to retain current tenants and attract new ones.

In Suburban Maryland, the vacancy rate increased by one percentage point to 16.9 percent.A push toward “right-sizing” of government contractors and federal offices promoted reductions in leasing demand.The quarter’s largest contraction was a consolidation by CSC that vacated almost 325,000 square feet in Prince George’s County. By 2014, the federal government is expected to have returned nearly 2 million vacant square feet to the market through consolidations and relocations of the U.S. Department of Health and Human Services, National Institute of Allergy and Infectious Diseases (NIAID), and National Cancer Institute. Additionally, tenants such as Choice Hotels and ASRC Federal will leave vacant space behind with limited back-filling from other tenants in the market.